A week after the second-largest banking collapse in US history, Treasury Secretary Janet Yellen told the Senate Finance Committee on Thursday that the nation’s banking system “remains sound” and Americans “can feel confident” about their deposits .
His remarks, against the backdrop of growing concerns about the health of the global financial system, were an effort to signal to markets that there would not be broader contagion since the collapse of California’s Silicon Valley Bank and New York’s Signature Bank.
Facing fierce questions from lawmakers about how Federal Reserve interest rates contributed to bank failures and whether taxpayers would bear the brunt of pledging to clean up depositors at banks, Yellen stressed the need for the federal government acts to ensure stability in the market.
“We certainly need to carefully analyze what happened to trigger these bank failures and examine our rules and oversight” to prevent the failures from happening again, Yellen told the committee.
Yellen was the first Biden administration official to face lawmakers over the decision to hedge uninsured money at two failed regional banks, a move some have criticized as a bank “bailout.”
“The government has taken decisive and forceful action to boost public confidence” in the US banking system, Yellen testified. “I can reassure committee members that our banking system remains robust and that Americans can be confident their deposits will be there when they need them.”
Yellen also defended the government’s argument that taxpayers will not bear the cost of protecting uninsured money at two failed regional banks.
The week was a whirlwind for markets around the world on concerns that banks could buckle under the weight of the fastest interest rate hike in decades. In Europe, troubles at Credit Suisse, Switzerland’s second-largest lender this week, prompted the Swiss central bank to agree to lend Credit Suisse up to 50 billion francs ($54 billion).
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In less than a week, Silicon Valley Bank, based in Santa Clara, California, went bankrupt after depositors rushed to withdraw money amid anxiety about the bank’s health. Then, regulators got together over the weekend and announced that New York-based Signature Bank has also failed. They ensured that all depositors, including those holding uninsured funds exceeding $250,000, were protected by federal deposit insurance.
The Justice Department and the Securities and Exchange Commission have since launched investigations into the collapse of Silicon Valley Bank.
Thursday’s hearing, set to address President Joe Biden’s budget proposal, came after the sudden collapse of the nation’s 16th largest bank and a go-to financial institution for tech entrepreneurs. While lawmakers questioned Yellen about the deficit and upcoming debt ceiling negotiations, many instead focused on the role regulators played in bank failures.
The “Biden administration’s handling of the economy has contributed to this,” insisted Sen. Tim Scott, RS.C. “I intend to hold regulators accountable.”
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Senator Mark Warner, D-Va., wondered aloud, “Where were the regulators in all of this?” and he called for accountability in the bank run.
“Nerves are certainly frayed right now,” said Sen. Ron Wyden, D-Ore., who chairs the committee. “One of the most important steps Congress can take now is to make sure there is no doubt about the full confidence and credit of the United States,” he said, referring to the debt ceiling increase.
Sen. Mike Crapo of Idaho, the top Republican on the committee, said, “I’m concerned about the precedent of guaranteeing all deposits,” calling the federal bailout action a “moral hazard.”
Yellen told CBS’ “Face the Nation” on Sunday that a bailout plan was not on the table, saying “we won’t do it again,” referring to the US government’s response to the 2008 financial crisis, which led to massive government bailout policies for big US banks.
Yellen, a former Federal Reserve chairman and former chairman of the San Francisco Federal Reserve during the 2008 financial crisis, was a prominent figure in last weekend’s resolution, designed to avert a larger systemic problem in the banking sector.
“This week’s actions demonstrate our unwavering commitment to ensuring depositors’ savings remain safe,” he said.
Sen. Sherrod Brown, D-Ohio, likened the bank’s collapse to pressure from the railroad industry that Democrats say contributed to the Eastern Palestine train derailment that shook an Ohio community. “We see aggressive lobbying like this by banks too,” he said.
In Europe, troubles at Credit Suisse, Switzerland’s second-largest lender, have deepened concerns about the global financial system.
Credit Suisse was in trouble long before the two US banks collapsed, but Wednesday’s news that the bank’s largest shareholder would not inject more money sent shares of European banks tumbling.
On Thursday, the Swiss central bank agreed to lend Credit Suisse up to 50 billion francs ($54 billion), sending its shares soaring.
Regulators are trying to reassure depositors that their money is safe. “They don’t want anyone to be the person who sits in a dark room or a dark cinema and screams fire, because that’s what drives them to run for the exits,” said Russ Mould, investment director at the investment platform. Online AJ Bell.
Despite the banking turmoil, the European Central Bank raised interest rates by half a percentage point to try to curb stubbornly high inflation, saying Europe’s banking sector is “resilient”, with sound finances and plenty of available liquidity.
ECB President Christine Lagarde said the central bank would provide additional support to the banking system if needed. She said banks “are in a completely different position than they were in 2008” because of the safeguards added after the financial crisis.
ECB Vice-President Luis de Guindos also said Europe’s exposure to Credit Suisse, which is outside the European Union’s banking supervisory framework, was “quite limited” and “not concentrated” in nowhere.
The Swiss bank, which has seen its stock decline for years, has pushed to raise money from investors and launch a new strategy to overcome a variety of problems, including bad hedge fund bets, repeated changes of its top management and a scandal. of espionage involving the Zurich rival UBS.